1. Cornerstones of Managerial Accounting 2e Chapter Fourteen
Support Department Cost Allocation
Mowen/Hansen
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2. Producing Departments
Directly responsible for creating the products or services sold to customers
Examples:
Grinding
Assembly
Use services of the support departments

3. Support Departments
Provide essential support services for producing departments
Examples:
Maintenance
Grounds
Engineering
Housekeeping
Personnel
Storage

4. Steps for Determining Product Costs by Using Predetermined Determined Overhead Rates
Departmentalize the firm.
Classify each department or a producing department.
Trace all overhead costs in the firm to a support department or producing department.
Assign support department costs to the producing departments using drivers that measure the consumption of support department services.
Calculate predetermined overhead rates for producing departments.
Assign overhead costs to the units of individual products using the predetermined overhead rates.

5. Drivers Activities that cause costs to be incurred
Used to assign support department costs to producing departments
Causal factors within a producing department that measure consumption of support service costs
Using drivers results in:
More accurate product costs
Managers having better control over the consumption of support services

6. Objectives of Assigning Support Department Costs
To obtain a mutually agreeable price
If costs are not accurate, bids could be:
Too high, causing a loss of potential business
Too low, producing losses
To compute product line profitability
Need to be sure all products are profitable
Managers are able to evaluate the mix of services offered

7. Objectives of Assigning Support Department Costs
To predict the economic effects of planning and control
To value inventory
GAAP requires direct manufacturing costs and all indirect manufacturing costs be assigned to products
To motivate managers
Managers will use a service until the marginal benefit of the service equals its marginal cost

8. Single Charging Rate
Used to assign support department costs to producing departments
Calculated as
Total expected service department cost divided by expected usage of all producing departments
Note: support departments are not assigned costs from other support departments
Rate is applied in one of two ways:
Budgeted rate × Budgeted usage
Budgeted rate × Actual usage

9. Budgeted Rate × Budgeted Usage
Computed at beginning of the year
Added to budgets of each producing department
Serves two purposes:
Enables a predetermined overhead rate to be computed for product costing
Sets a benchmark for comparing actual performance with planned performance

10. Budgeted Rate × Actual Usage
Computed at end of the year
Provides the actual cost assigned to the producing departments
Needed for comparing with planned performance

11. Multiple Charging Rates
Support departments costs include:
Variable
Assigned on a per unit of service basis
Fixed
Considered capacity costs
Initially based on peak usage of the producing departments
Assigned based on proportion of planned peak usage

12. Allocation Methods Most companies have multiple support departments
Support departments provide services to both producing departments and other support departments
Three allocation methods:
Direct method
Sequential method
Reciprocal method

13. Direct Method Ignores the interactions between support departments
Allocates costs to producing departments only
Simplest and most straightforward method
Either single or dual-rate allocation:
Single rate
Total service costs assigned based on expected or normal usage
Dual rate
Variable service costs assigned based on expected or normal usage
Fixed costs are assigned in proportion to the expected peak usage of the service

14. Sequential Method
Recognizes the interactions between support departments
Does not fully account for the interaction
Allocation performed in a step-down fashion following a predetermined ranking procedure
Costs of the support department providing the most service is allocated first
All costs of support departments are allocated:
Direct costs
Costs allocated to it from other support departments

15. Reciprocal Method
Recognizes all interactions between support departments
Each support department’s costs are allocated to the:
Producing departments
Other support departments
Complicated method that is not widely used
Accomplished through a system of simultaneous linear equations

16. Departmental Overhead Rates
Computed after all support department costs are allocated
Costs to be allocated should include:
Allocated support department costs
Overhead costs that are directly traceable to the producing department
Divide by a measure of activity
Direct labor hours
Machine hours